USA S Corporation Shareholders' Personal Expenses

[Newbee30]

Hello everyone. I'm new to this community and new to accounting. I need some help, Please!

I recently stated working for a mid size S Corporation and the President and CEO are the shareholders. They routinely have me pay for their personal expenses like mortgage, car repairs, children's tuition, and family loans though the corporations wage expense account instead of using an owner's draw account.

When I process payroll, they have me enter manual adjustments to increase their wages (their stated salaries are low considering company revenue). These adjustments allow the company to pay their personal taxes. This can't be correct. Someone please advise.

Sorry for the long Story

 

[ArcSine]

What they're doing is not incorrect, but it's understandable that at first glance it might appear to involve some monkey business.

Suppose I own (as shareholder) a corporation, and also work there full time. I have a 20% personal income tax rate, and suppose also that I owe Sofie Vergara $80 for last week's aerobics lesson (pipe down; I'm making up this story and I can spin it however I want).

• I could have the company issue me a paycheck for $100. I then remit my personal 20% (= $20) to the government, and then write a personal check to Sofie for the $80.

• Or, I have the company issue a paycheck with a $100 gross amount, the company withholds (and remits to the gov't) $20, and my net paycheck is $80. I use this net paycheck to pay Sofie's bill.

• Equivalently, and just to cut down on all this check-writing a bit, I could have my company (1) send an $80 check directly to Sofie; (2) send $20 directly to the gov't on my behalf; and (3) record on the payroll books a paycheck entry to me, showing $100 gross, $20 withholding, and $80 net; all of which will appear on my W-2 at the end of the year.

All three approaches have the same results, on the company's books, in the payroll records and year-end W-2, and for government purposes. The third approach, of the three I described, is essentially what your employer is doing. The check issued for the personal mortgage, car repair, etc., is the "net" paycheck, and your adjustments are "grossing up" the net pay to cover the taxes.

While their approach is not incorrect, it's kinda haphazard and has the potential for giving rise to confusing errors. It'd be cleaner if they'd just take sufficient payroll checks from the corporation, and then pay their personal expenses from their personal checkbooks.